The amount of uncertainty that the humans face day to day far eclipses the amount of risk
that they face. Volatility is a risk.
It is not an uncertainty.
Bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty.
Hi, everyone. I'm Giovanni, and today I have the pleasure to be joined by Pierre Rochard,
Bitcoin advisor, co-founder of the Satoshi Nakamoto Institute and currently Bitcoin
strategist at Kraken.
Thanks for being with us, Pierre.
Yeah, sure thing. Thanks for having me.
You joined Kraken in October last year as the exchanges Bitcoin strategist or as often
reported in the press, Bitcoin evangelist.
Why does Kraken need a Bitcoin evangelist?
Yeah, so it started out as kind of tongue-in-cheek because people described Bitcoin as a
religion. So I thought it would be funny to title myself that.
But ultimately I think that not everyone shares my sense of humor.
So I switched it to Bitcoin strategist, which is a little more serious and also just more
accurate as to what I'm doing day to day here.
And the reason that a cryptocurrency exchange needs Bitcoin strategists is that the
mission is the adoption of cryptocurrency.
And so from that perspective, figuring out, OK, what is the most effective way of getting
the adoption of cryptocurrency to happen and to grow the ecosystem and to ultimately grow
the market size for an exchange like Kraken.
You need to have someone who is focused on that.
Would you define yourself as a Bitcoin maximalist?
Now I'm a Bitcoin minimalist.
From my perspective, the goal of Bitcoin is really about how do we have a system with
constraints such that it is able to remain decentralized.
And that is actually the biggest challenge, I think, in this space and why scaling has
been such an acrimonious and, you know, large debate.
So from that perspective, it's not so much about, OK, how can we put everything into the
Bitcoin protocol and how can we, you know, that's kind of the maximalist position of how
do we get everything into Bitcoin.
My view is how do we get as little as possible into Bitcoin?
And so really, we want to be focused on what are Bitcoin's assurances.
Right. Being permissionless, being censorship resistant, seizure resistant and having a
monetary policy and all of those enforced by the peer to peer network of nodes.
And then, of course, the proof of work mining on top of that.
So when we're trying to think about how to scale Bitcoin and, you know, let's say,
maximize its utility.
Right. And maximize its efficiency, we're really trying to minimize the footprint.
Right. Which is the cost on one side and then the benefit on the other side.
And so I think that the maximalists label doesn't really apply to me from there.
I don't think that financial intermediation necessarily can be trust minimized or trust
less in the same way that Bitcoin is.
You know, when you're lending money to someone or you're investing in their business,
ultimately you do have to trust them.
It doesn't actually matter if the contracts that you are engaging in is going to have its
execution be automated in a blockchain.
You know, that's just the operational backoffice efficiency from a database perspective.
It's kind of a technical implementation detail.
Ultimately, you're still trusting them, right?
You're still trusting them to perform and you're still trusting them to provide a return
on your investment. And so I actually see a very minimal role for the technology, you
know, on the financial intermediation layer.
And I think that, you know, the financial intermediation is going to continue to be
essentially a trusted third party service because it doesn't scale otherwise.
Otherwise, you have to be managing your own credit portfolio.
And, you know, people throughout history have always outsourced that performance of
credit, due diligence and credit, you know, servicing to other third parties.
And I think that will continue to be the case.
Ok. So we have a lot of meat on the fire for this because you mentioned a lot of
interesting things. The first thing that I want to clarify is when you say that you
wanted as minimal as possible to be added into Bitcoin, that sounds like being a Bitcoin
conservative, like someone who thinks that already Bitcoin is as perfect as it is.
So, I think that that would be kind of a normative approach of like me wanting that to be
the case. Right. But I think that I see it as more of a positive approach of me accepting
that that is the case.
Right. So because Bitcoin is decentralized, it would actually be very difficult to expand
its scope and expanding its scope actually, from a technical perspective, requires during
a hard fork and knocking people off the network.
Whereas reducing its scope is a soft fork and is backwards and forwards compatible.
And so that allows you to continue to increase Bitcoin's utility without excluding people
from the network. And I think that the inclusive approach of, hey, let's try to have a
protocol that is very stable and does not exclude others is a better approach than
constantly trying too hard for it.
I'm asking you that because I was reading the website of the Satoshi Nakamoto Institute,
which you founded, which says that the Bitcoin is not the beginning, nor is the end.
So that means that you imply that there should be some sort of evolution in the way
Bitcoin works. Yeah, absolutely.
So if we look at the history of the Bitcoin protocol, we've seen a number of very
successful hard forks occur.
The biggest one and the latest one was SegWit.
I think that there will be more.
You know, just on the immediate roadmap, we have Taproot, which is a big change in
Bitcoin's scripting language.
And so I think that, you know, if you constrain the design space to things that are
forward and backward compatible, then, yes, it does limit what you're gonna be able to
do. But I think that it's a wild exaggeration to say that that causes protocol
ossification. Right.
Of, okay, now, we can no longer change anything.
I don't think that's true from an engineering perspective, and it's certainly not true
from a historical perspective.
So, for example, there've been other soft forks like check sequence verify, check block
time verify that these and then obviously SegWit, these protocol evolutions over the past
decade have enabled layer two solutions.
And so now we're seeing Lightning be increasingly looked at as a future of Bitcoin.
So I think that, you know, I do agree that on the Nakamoto Institute we need to write
more about this.
But it's certainly the case that Bitcoin is continuing to move forward.
You criticized the core definition of money based on the three main functions: store of
value, medium of exchange and unit of account.
So what's wrong with that definition?
So, I mean, it's a fine first attempt at a definition of money.
But ultimately, I think that the issue with it is that it's not looking at it from the,
first of all, the subjectivist point of view.
Right. So subjectivism is maybe less popular in other schools of thought, but it's a
central piece of Austrian economics.
So once you start looking at monetary phenomenon, you have to look at it from the
perspective of individuals acting in the economy.
So why is it that individuals, you know, use money?
Why do they hold cash balances?
Right. And what it comes down to is a dichotomy between the concept of risk and
uncertainty. And this is not exclusive to the Austrian school.
In fact, Keynesians and neoclassical economists have written about this as well.
And I think that they largely agree on the framework.
They just disagree on the implications from a public policy perspective and then from
like a normative what should a monetary system look like.
But in any case, risk is quantifiable, right, you're able to attach a
probability to a certain set of outcomes, a known set of outcomes.
And so that's what, you know, actuaries do.
And that's what insurance is for.
So in a perfect world, if we only had risk and we were able to quantify all of the future
outcomes and the known set of outcomes, then we would actually be able to not hold any
cash. All we would have to do is enter into insurance contracts for various contingencies
and money would actually just not even really be a thing in our economy.
It's hard for us to conceive of because that's not what, that's not the reality we live
in. The reality we live in is just filled with uncertainty.
And in fact, the amount of uncertainty that the humans face day to day far eclipses the
amount of risk that they face.
And so the number of insurable risks that exist in the economy or in life.
Let's say not just economic.
The amount of risk that we face is actually very, very small.
And so the trend we've actually seen is that governments transform uncertainty into risk.
Now we can endlessly debate about whether that's good or bad.
I won't get into this kind of political question.
But from a monetary economics perspective, the reason we hold cash is to hedge future
uncertain cash flows.
So when we think about uncertain future cash flows, it's not necessarily the case that
we're only thinking about them in a negative sense.
Right. Of okay, we're concerned about are we going to have unforeseen losses.
Right. So, you know, I might lose my job.
Right. That would be an uncertain future cash flow.
Or will I be able to sell my product?
That would be an uncertain future cash flow for business.
And so that negative side, like we've seen it with the COVID-19 pandemic, which impacted
some businesses severely and dramatically cut their revenues.
Now there's some debate about whether pandemics are risk or uncertainty.
But I think there certainly a mixture of both.
And so there's the negative side, but there's also the positive side of not knowing when
are you going to have interesting investment opportunities, for example.
And so you don't never know what is going to come across your table as an investor.
And that's why investors have to hold some amount of cash because they don't know what
the future opportunities space is going to be like.
And that's a fundamental uncertainty.
There's no way you could insure yourself against the possibility of having, you know,
your brother in law present his great new business plan for his restaurant.
What's the role played by Bitcoin in this uncertainty framework?
So ultimately, when you're thinking about how to hedge anything that the hedging asset,
you want it to be the diametric opposite of what is being hedged.
Right. So if you're hedging against uncertainty, you want to hold the least uncertain
asset possible.
And so my argument is that if you look across the different sources of uncertainty in a
monetary system, Bitcoin is actually the least uncertain monetary asset in existence
today. And so that's why I think that if we look at money from this framework, it
actually makes it much more understandable why Bitcoin is interesting.
Now, people will, you know, react to that and say, well, no, hold on, the volatility.
Right. There's too much volatility.
Volatility is a risk.
It is not an uncertainty.
And so you can actually insure yourself against volatility by buying puts or by selling
futures. And that is what is going to allow you to use Bitcoin's uncertainty, minimizing
properties. Right.
And hold Bitcoin while hedging your downside risk of the price going down far more than
you want over a certain timeframe.
Ok. I agree with you that volatility can be hedged.
But what about uncertainty?
What does make Bitcoin so little uncertain?
So if we think about the monetary system and how we interact with it, I see four different
key parts. The first one is, are we actually able to even access it?
Right. So this is, you know, the ability to just receive money, receive cash.
And this is, I think, an area where Bitcoin really shines is the permissionless nature of
it. Anyone can generate a private key, derive a public key, you know, encode it into an
address and receive Bitcoin.
So from that perspective, I think that there's not, now, contrast with, you know, any
other monetary system already, I think Bitcoin exceeds their properties.
So, for example, gold, you're going to have to be able to send it through the mail.
You know, the Postal Service are going to receive some mail with some good nuggets in it.
And then same thing with cash, right.
That put cash in the mail to do that.
Or you get a bank account.
Bank accounts are not permissionless.
And so you do have to get permission, whether it's from the financial institution or from
the government or some combination of both.
So already wether from an access perspective of being able to receive the monetary
assets, I think that it's clear that Bitcoin has less uncertainty than the alternatives.
You're basically saying that something that's permissioned is more uncertain than
something that is permissionless?
Just by definition, right.
Because otherwise, you know, and it doesn't even necessarily have to be that the
government or the bank has flagged you as being a bad person.
It could just be by accident.
Right. Or by a business decision that they've decided not to bank.
So it's not. Or, you know, it's not the Postal Service that refuses to mail your gold.
It's that your mail could get lost.
The Postal Service or an employee steals it.
You know, tthere's all sorts of contingencies there that are uncertainties, not risks.
And so for, you know, if you contrast it with how the Bitcoin system works, there's just
a lot less uncertainty there.
So the second property is the seizure resistance.
And so this has to do with, OK, once you have received the cash and it is on your balance
sheet, what is the cost of someone else seizing it?
So nothing is ever seizure proof, right.
There's no such thing that's being seizure proof.
But you can have seizure resistance in the sense that the cost of seizing this monetary
asset is greater than the cost of seizing any other asset.
And so that's where, you know, you look at hardware wallets, you look at multis sic.
These are all solutions that are increasing Bitcoin seizure resistance.
Now, contrast it with, you know, a bank account.
Obviously, that's not seizure resistant at all.
Those get seized all the time.
Cash gets seized.
We hear stories about people at the border.
You know, you got 10,000 dollars in cash that gets seized.
They don't even have legal protection for it.
Right. That's in the United States, civil asset forfeiture.
And so there's even a lack of due process.
Gold, same issue. Right.
You hear about people trying to smuggle gold across borders.
So Bitcoin is just, now, we can debate about different scenarios.
Right. But the bottom line is that if you look at the expected cost of seizing Bitcoin,
it's just greater than the expected cost of seizing gold or physical cash or especially a
bank account like this. Bank account is like the most seazable thing ever.
It gets seized all the time.
So actually, I wanted to actually ask you about this.
So is Bitcoin really unseazable because at the end of the day right now, most of Bitcoin
is held in centralized financial institutions like centralized exchanges, like Kraken
itself. So these centralized entities can be cracked down by governments theoretically.
So in this case, the government can actually seize your Bitcoin.
Yeah, that's correct. So if you think about when you go to a jewelry store or you know,
you're going to go buy a watch, some watches are waterproof, which means that you can go
diving with them or other watches are water resistant, which means that they can get a
little bit of splashing on them.
There's a certain cost to getting them wet.
Right. You got to dive into the water.
But then you've got other watches that are not water resistant at all.
And if you even get a drop of water on it, it stops working or it starts rusting.
So the way to think about it is that Bitcoin is not seizure proof.
Right. So there's always a way to seize Bitcoin and we've seen it happen.
We saw it happen in the case of the Silk Road with Ross Ulbricht.
How did he get seized?
He left his laptop open and the FBI or the DEA agents were able to access his Bitcoin
while it's, you know, just on his laptop, because they were up.
If he had closed his laptop and it had been on an encrypted hard drive, well, now the
cost, you know, the cost would have been much greater.
Right. They would have had to crack the hard drive, the hard drives' encryption.
So it's not so much thinking about it from, like, OK, is it seizure proof?
It's more about, you know, when you're running away from a bear, you just need to be
faster than the next guy.
Right. You just need to have a higher cost of seizing it than the next asset.
And then from that point on, you can say Bitcoin is less uncertain than that asset.
The third point is the censorship resistance.
So again, here, it's not about being censorship proof, right.
Nothing is censorship proof.
It's about the cost of censoring Bitcoin transactions.
So the cost of preventing someone from sending their Bitcoin to someone else.
What is that?
And so if you look at the Bitcoin system, the censorship resistance actually comes from
the ability, first of all, to broadcast the transaction.
So there's a number of different ways of broadcasting a transaction.
You could do it over the normal Internet.
You could do it over TOR.
You can do it over shortwave radio.
You could even do it by mail.
If you mail someone if you print out a Bitcoin transaction and you mail it to someone,
they could broadcast it.
So there's all sorts of different creative ways of doing that.
It's actually very little data.
If you look at how much data a transaction takes up.
And so then from the point that you broadcasted it and then it gets to the minor, then
it's about getting the transaction into a block.
And this is where Bitcoin's game theory really comes into play and really shines, is that
you have a prisoner's dilemma between the miners where so, you know, if a miner wants to
exclude a transaction, they are going to forego the transaction fee revenue that they
would get from including that transaction, from mining it, from including it into the
block. Instead, the next miner who actually does include it in a block will get the
transaction fee. And so miners are always competing against each other.
Mining pools are competing against each other to include, you know, transaction fees
into the blocks in order to make money, you know, as mining sector, as miners.
And so that's where the Bitcoin censorship resistance comes from.
The fourth one is Bitcoin monetary policy.
So when we think about, you know, uncertainty in a monetary system, fiat actually
maximizes the uncertainty of the monetary policy.
And so you'll hear central bankers say things like, we will print as much.
We will create as many monetary units as we want to.
Right. So they are establishing that, they're establishing that they're going to have
maximum uncertainty in terms of their monetary policy.
Why do they do that?
They do that because they are trading that monetary policy uncertainty to minimize the
price risk of their currency.
Right. They are trying to maximize the price stability of the monetary unit at the
expense of the monetary policy uncertainty.
Bitcoin does the opposite.
Bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty.
Now, different schools of thought are going to disagree on which approach is better.
I think the market will decide.
And, you know, I think that if the market is able to hedge the price risk, then actually,
you know, there's a cost associated with hedging.
Obviously, you've got to pay the cost of the futures contract or the cost of buying a put.
But ultimately, is that costs greater than the cost of maximizing monetary policy
uncertainty for fiat.
And gold is actually still pretty competitive on monetary policy uncertainty because
there's a cost associated with mining gold.
But nevertheless, there has been uncertainty in gold supply in the past.
Right. So, for example, when the new world was discovered and gold imports to Europe
dramatically increased, that was uncertainty.
Same thing. For example, if we did asteroid mining and we brought back an asteroid with a
massive amount of gold, that's uncertainty.
And so Bitcoin, you know, with the halvings, with the difficulty adjustments, it really
has the least uncertain monetary policy.
On the other hand, other monetary assets like the US dollar, has a history much bigger
than the one of Bitcoin.
At the end of the day, I think the level of uncertainty does depend also on the period
of time. The specific monetary system has been battle tested.
Bitcoin has 10 years of life.
The dollar has far more.
Don't you think also the time has some influence on the level of uncertainty to calculate
the uncertainty? Well, so you're only calculate risk, right.
So the risk is what's quantifiable.
And I agree that the dollar's lifespan certainly reduces its risk from a purchasing power
perspective. But from an institutional uncertainty perspective, I actually don't think
that its lifespan has any effect on that because it has transformed so much over its
life. Right. And it actually if you look at the history of the dollar, it is a series of
reminders of why the dollar is uncertain.
Right. It started out where the dollar represented a fixed amount of gold.
And today the dollar represents nothing.
Right. So it represents the credibility of the Federal Reserve.
Thanks for being with us today, Pierre.
That was cool. Yeah, sure thing.
Thanks for having me. That was Pierre Rochard, Bitcoin strategist at Kraken.
As always, if you enjoyed this interview, smash the like button and subscribe to our channel.
2 comments:
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